RRSP vs TFSA? First, the Numbers

Trying to save for retirement but unable to figure out if putting money into an RRSP is better than a TFSA? Welcome to the party, you are not alone.

Our previous blog post RRSP vs TFSA vs RESP vs Non-Registered Taxable Account took a general look and gave rules of thumb. Now we get more specific in comparing the RRSP against the TFSA.

The Calculator
TaxTips.ca offers a free and quite complete tax TFSA vs RRSP Calculator (see screen shot below) that can compare the two in terms of after-tax cash flows from the working and saving years right through retirement. The customization to one's own circumstances includes all the key factors - province of residence to reflect different provincial tax rates, current age, intended age to convert RRSP to RRIF or to begin receiving CPP, how much CPP and OAS entitlement one will have, pension income other than the RRSP or TFSA, amount of contribution to the RRSP, or TFSA (the latter which the calculator adjusts to make it exactly equivalent after-tax to the RRSP contribution) and estimated future portfolio rate of return within the RRSP/TFSA. Behind the scenes the calculator uses the appropriate tax rates, tax clawbacks and credits to show year by year how much spending after-tax money you end with.

After you select all the variables and click "Calculate" the big blue text line tells you whether the TFSA or the RRSP is best overall. Wonderful!


The Results
We tested across a range of income levels from $35,000 to $120,000 for a hypothetical single 30 year old in the various provinces. The bottom line number we look for is what percent of after-tax disposable income the RRSP/TFSA replaces, the higher the better.

• TFSA Always Wins for the $35,000 Wage Earner - that's in every province; the result is mainly due to not losing out on benefits like OAS and GIS
• RRSP Always Wins for All Higher Pre-Retirement Income Levels - MillionDollar Journey's post TFSA vs RRSP - Best Retirement Vehicle? puts the cut-off more precisely at $37,000
• The Margin of Advantage is Always Quite Small, No More than About 1.5% - that's right, across all income levels and the scenarios discussed below, whether the TFSA or the RRSP wins, the total lifetime cash flows, as expressed in their Net Present Value, and shown at the bottom of the Calculator's Results table, is never very greatly different!
• TFSA Alone is Not Adequate for High Income Earners - the $5000 annual contribution limit on the TFSA makes it impossible for those at $120,000 to save enough to achieve even minimal 60% income replacement. Thus, in practical terms, the RRSP is a required element for retirement saving for high earners.

Key Scenarios
Next we looked at a couple of scenarios for the assumptions that matter the most: a) portfolio return - instead of our base 3%, we tried 5%, which we dub the "Excellent Market Returns" scenario, and b) savings to be depleted over 20 years (by age 85) instead of our base 30 years, which we call the "Die per Average Life Expectancy" scenario.

• Higher Portfolio Rates of Return Matter More than How Long the Savings Must Last - Effective investing matters. The results of our scenarios show a much greater effect in retirement disposable income from a change in returns to 5% than shortening the retirement period from 30 to 20 years. A low-cost portfolio that includes a good portion of higher-return, though riskier equities, makes a big difference, as we blogged about in our previous post.

Those are the numbers. Overall, it looks as though the TFSA should be the automatic choice for low earners - those earning $37,000 or less - and the RRSP the preferred vehicle for those in the highest income category. In between, it doesn't seem to matter much.

However, there are other considerations that can change the picture and in our view affect the best strategy, as we will explain in our next post.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

What is a Viable Mix for Retirement Savings Success?

Are you on track for building a financially sustainable retirement? How can you know if you are making progress whether you are 35 or 55?

Saving and investing enough depends on several factors that inter-twine and affect one another:
- what age you stop working and retire,
- how many years you save,
- your savings rate,
- your desired retirement spending,
- how long you will live,
- the returns from the portfolio where your savings are invested.
In addition, there is the make-up of the portfolio between stocks, bonds and other asset classes to decide.

It is easy to see that deciding on a viable mix can seem dauntingly complex. Obviously, the longer you work and save, delaying retirement, the lower the required savings rate needs to be. The more stocks in the portfolio as opposed to bonds, the higher the return should be, but there is more chance of stocks doing one of their familiar nose-dives at the wrong time, just at the start of retirement. The question everyone faces: what are the numbers to use?

The Past as a Guide
One way to get a good idea, if not a definitive answer, since we can never be sure the future will be exactly the same, is to look at what happened and what worked in the past. Using a long enough period that includes recessions, inflationary periods, depressions, booms, wars, financial crises, bubbles and crashes, we can gain some confidence that the numbers might be worth considering.

Enter researcher professor Wade Pfau of the National Graduate Institute for Policy Studies in Tokyo, Japan, who has done some interesting number-crunching in his paper Getting on Track for a Sustainable Retirement: A Reality Check on Saving and Work. He has figured out what various combinations of retirement age, income replacement level and asset allocation would have ensured that a person would never have run out of money up to age 100 (few of us get to live as long as Jack Rabbit Johannsen) assuming that the person had already saved a certain amount to date. In other words, he has looked at the worst case scenario for anyone retiring anytime during most of the 20th century (though he cannot go beyond anyone who would be less than 100 in 2010 e.g. a 55 year old retiree of 1965, who would have 45 years of retirement by 2010, or a 65 year old retiree of 1975, who would have 35 years).

The Example of a 55 Year Old
Pfau uses as his base case the example of a 55 year old making decisions about what to do. This is what Pfau determined.

• To maintain a spending rate of 50% of final salary, a person could have retired at 67 if he/she had already accumulated savings of six times his/her annual salary and was prepared to save 15% of their annual salary continually till retirement using a mix of 60% stock (S&P Composite Index) and 40% fixed income (six-month commercial paper) - see the blue-circled cell in the top panel of the table below copied from the paper. For instance, a person earning $60,000 per year would need to have $360,000 in retirement savings already and to set aside $9,000 per year till age 67.
• If the person lowered the stock allocation to 40%, retirement age would rise to 70 - per the middle panel blue-circled cell
  
• If the person wanted a higher 60% of final salary replacement spending level, retirement age would rise to 69 - per the lower panel blue-circled cell
• If the person had only saved up four times their annual salary so far and could only manage to save 10% of earnings per year, retirement age would rise to 72 - per the upper panel red-circled cell.

Ages 35, 40, 45, 50 or 60
Prof. Pfau has used the same assumptions and methods to calculate the path forward for individuals 35, 45, 50 and 60 in his blog post Getting on Track for Retirement. The table for 40-year olds is here in another post.

Taking one example from these tables, we see that a 35 year old with zero retirement savings today could still retire at 66 (blue-circled cell in the table below) at the 50% spending rate by saving 15% per year.

Stock Allocation Sweet Spot 40 to 60%
One fascinating fact coming out of the middle panel of all the tables, whatever the age at which the look forward starts, is that an optimal allocation percentage to stocks looks to lie between 40% and 60%. A higher allocation to stocks lowers possible retirement age little if at all. Below 40%, the safety of fixed income comes with a significantly increasing higher retirement age, due no doubt to the much lower returns historically achieved by fixed income.

Lower Income Replacement Gives Earlier Retirement
A 10% cut in income replacement rate from 50% to 40% has as much effect in lowering viable retirement age - three years, from 67 to 64 - as having saved eight times your salary by age 55 instead of only six times (see the green circled cells in the first table above). In the example of the $60,000 earner, is it easier or more worthwhile to save $480,000 instead of $360,000 by age 55, or cut annual retirement spending from $30,000 to $24,000.

Caveats and Cautions
We believe that though very useful, the tables should be used to ballpark and to judge rough trade-offs, not to set precise expectations.

• Data is for the USA and though similar, Canadian investment returns have not been identical and will not be in future either. Whether this means higher or lower, we cannot be sure since Prof. Pfau has not run any numbers for Canada.
• Investment management fees have not been deducted as the study uses index data. That would lower returns and raise potential retirement age and required savings rates to obtain the same income replacement rate.
• A constant spending rate throughout retirement probably over-estimates what usually happens as people slow down as age advances. People also can cut back if returns are poor. Similarly, setting 100 as the age to which income is required overdoes it since life expectancy, while it continues to creep up constantly, is still only just over 80. Applying those factors would all enable a lower retirement age or lower savings rate.

The test that the portfolio should never have run out of money is very stringent. The high required savings rates are necessary in a minority of all the years considered, as Pfau's figure 4 shows. Taking a chance that the retirement years will be blessed with reasonable investment returns may suffice. Which part of the past will the future be like? No one knows. Pfau lays out an ultra-cautious approach. It may not even suffice if the future brings something worse than any period yet recorded. We sincerely hope, and expect, not.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Investor Forecast: Stormy Weather, Not Falling Sky

Since early this year, it feels as though there have constant steep drops in stock markets with every upward recovery being smaller and then followed by an even bigger decline. Indeed, the numbers confirm the impression: S&P TSX Composite Index's 1-year price return is -7.3%, the year-to-date price return is -14.8%, the price change since 2011 peak on April 5 -19.4%. The Google Finance chart of this period really doesn't look pretty.


Is the "Sky Falling"? - The feeling that things can and quite possibly might get even worse is quite understandable. Major country economies are weak, possibly heading into recession. On top of that, if a default by Greece could provoke a chain reaction to other European countries, what might be the result of country defaults considering that a mere investment bank's (Lehman) downfall in 2008 led to that horrendous market crash?

Answer: No, though there are definite menacing clouds, we believe the Sky is Not Falling. As we blogged about a few months back in Investing Risk: Defaults, or how often do investments go belly up?, country defaults happen, the last peak episode being around 1990 according to the chart in that post. The world weathered that period. Whether various authorities manage to prevent the seemingly inevitable default of Greece, the world economy is likely to survive and then revive after such an occurrence. Also instructive is the history of the recurrence of significant market losing periods, which we blogged about in Investing Risk: Historical Worst Volatility, Business Cycles, Crashes and Crises. The lesson of history is that it may take many years to recover but recovery does ensue, even in the very worst episodes of the past.

What therefore should we as investors do?

Action item 1 - Set Expectation to Long Holding Period for Equities: Our allocation of money to stocks must go along with an expectation of a holding period of at least ten years before we intend to cash in and start spending the money. The knowledge that we will not be needing the funds for many years will allow us to weather the financial storm and its aftermath. Setting our expectations appropriately helps us sleep better and avoid panic selling.

Action item 2 - Rebalance the Portfolio: A portfolio should contain target percentages of cash, fixed income and equities in proportions which we suggest should be explicitly set out, as we explained in the post on Investment Policy. Since equities have declined quite a bit while fixed income has stayed constant or gone up (e.g. the iShares DEX Universe Bond Index ETF - TSX: XBB - is up 2.6% over the past year), it is quite likely the equity vs fixed income percentages have gone out of whack. If the proportions have gone far enough askew, then now is an opportune time to take the cash or sell fixed income to buy equities. For more see our post on Rebalancing - What, Why and How.

Current stock market valuations are encouraging in that sense as they are at levels low enough to promise reasonable future returns for equities. Using the sources we blogged about in February 2010 in Is the Stock Market Over- or Under-Valued?, the signs are more promising or at least not worse now than back then.

• InvestorsFriend.com's Shawn Allen figured as of September 28th that the TSX Composite Index fair value is somewhere around 11,838, implying an investor could get an 8% return over a ten-year holding period. With the TSX gyrating around that level as of Oct.13th, the prospects are quite reasonable.
  
• Ben Stein and Phil DeMuth's Yes, You Can Time the Market indicators (Price, P/E Ratio, Dividend Yield, Earnings Yield vs AAA Bonds) for the S&P 500 bellwether US market index as of September 30th were all flashing Green for Buy.
• The CAPE vs q Ratio calculated by Smithers & Co. on September 16th showed the S&P 500 to be still over-priced at a price level of 1216, not much different from February 2010, but today the S&P 500 is lower at about 1200 so it would be less over-priced.
  
• In the same vein, the Schiller CAPE ratio is the same at 19.8 as it was in February 2010, and thus still exceeds the long-term average of 16.
  

The most fearful situation for most is having to face the unknown. It is easier to face adversity when it is defined. We hope that with the above facts in mind, our investor readers can be more confident and less anxious for the long term.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above commentary is not an investment recommendation. It rests on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

And Now for Some Good News - Low & Stable Inflation Expected

Amongst all the big market swings and dire news of countries at risk of defaulting on debt, there's one key economic variable whose outlook is relatively benign that is of crucial interest to investors - future inflation rates.

Big unexpected leaps in inflation that hurt both stocks and bonds do not seem to be in the cards at the moment, despite the latest CPI figures from Stats Can for August which showed a still-high rate of 3.1%.

The future according to:
Economists

• BMO Capital Markets: forecasts 2.0% in 2012
• TD Economics: forecasts 1.7% in 2012 and 1.9% in 2013
• RBC Economics Research: forecasts 1.9% in 2012
• International Monetary Fund: 2.0% 2012 through 2016 as shown in the chart below from Google's Public Data Explorer.

Bank of Canada - The organization responsible for monitoring and controlling inflation in Canada states that its

• official Inflation Control Target is still 2% with an allowable band of 1-3%
  

The Market - By subtracting what investors are willing to pay (accept as a return) for inflation-indexed Real Return Bonds from ordinary non-inflation indexed Canadian government bonds of similar maturity, we can infer the market expectation of inflation. Reuters thankfully has been doing the tracking for us in the Canada Breakeven 20 Year chart, the update as of September 29, 2011 shown below. Note how expectations have varied quite a bit in the last five years, though never going above about 2.8%.

• current expectation 2.08%

Best future inflation estimate: 2%

How likely is it the forecasts will be correct?
We all know how prone to error forecasts can be. CanadianFinancialDIY blogged about a Credit Suisse report that surprisingly found central bankers to be the most accurate though they too erred by more than 1% above and below the eventual real rate.

What does it mean for the investor? Low and, especially, stable inflation would remove a major troubling element for investors as inflation is a potentially very nasty risk (see our recent post on how how bad inflation and its effects have been in the past). Despite the good forecasts it may still be wise to be cautious and hedge bets by building inflation protection into a portfolio, as we discussed in Investments to Protect against Inflation and in Investing Risk: What is there to Lose?

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Twelve Tricks in Financial Statements and How to Detect Them

Last post we listed a dozen general warning signs that company management may be up to no good and be trying to conceal outright illegal fraud or painting a rosier-than-justified but still legal picture of the financial condition of the company. This week we look at some of tricks of the managers and a few ways to detect the manipulation.

Deceptions on the Balance Sheet

1) Liability provision for Product Warranties in excess of what's needed to cover actual costs. This reduces current earnings and creates a "cookie jar", as Al and Mark Rosen describe in their book Swindlers, that can be used later on to boost earnings by simply reversing the excess provision. The obvious sign: the provision rises significantly and out of line with sales.

2) Excessive restructuring charges upon a reorganization or cutbacks, often after poor results. Erring on the high side gives management the opportunity to look good by using this form of the cookie jar to boost earnings in subsequent quarters and try to deceive investors that a quick turn-around has taken place.

3) Resource companies can use, and often have used, asset writedowns to lower earnings initially and then raise them later by reversing the writedown. Similarly reserves for claims are a key variable in life insurance companies, or loan loss provisions in banks and it is very difficult for an investor to figure out what such values should be, even at times company management is trying its best to be forthright.

4) Expenses booked as an increase to Assets - capitalized expenses - instead of including the amounts in operating expenses. This results in higher immediate earnings. One way to uncover this subterfuge is to to compare the choice of methods used to capitalize expenses in other similar companies, as explained in notes to financial statements. It also helps to compare the depreciation and amortization expense amounts with the average asset balance. If either depreciation expense as a percentage of fixed assets or amortization expense as a percentage of intangible assets is much lower than in prior years, this might indicate the fraudulent classification of operating expenditures as capital expenditures. (from What's Your Fraud IQ? in the Journal of Accountancy)

5) Hidden asset impairments that should trigger a reduction in earnings through writedowns but don't because hidden. Such impairments might consist of obsolete equipment and facilities in industries like manufacturing, technology, media and communications. At an extreme of impact, we note the example of toxic mortgage and related derivatives assets on bank balance sheets which played a central role in the credit crisis. Often the problem is hidden in a manner that is quite within accounting accounting rules but which effectively masks economic reality by choosing a favourable valuation technique. The way to discover the ruse is to read the notes to financial statements regarding accounting assumptions and then to compare with other companies in the same sector.

6) Significant liabilities off the balance sheet. Items such as leases and contractual obligations and pension liabilities can hide a weak financial situation. Tracking them down involves going through various sections of quarterly and annual reports such as the notes and the management's discussion and analysis, the company's annual information form and the proxy circular.

7) Omitted or down-played contingent liabilities. The best example is the possible impact of lawsuits, which companies are wont to under-emphasize, if only to not publicly admit culpability before a case is settled. There may not be a hard and fast answer until actual resolution of a lawsuit but the investor may be able to develop a sense of where things are heading by reading up on what is said in the media, for which Internet search tools are a wonderful help.

Trickery in the Income Statement

8) Lower credit standards, allowing more people or firms to buy products, who otherwise would not be accepted. This raises sales in the near term but results in higher future write-offs for uncollectible bills.

9) Premature recognition of revenue in multi-year contracts, such as construction and projects, through overstating progress towards completion, again in order to enhance immediate earnings.

10) Fictitious sales are outright illegal fraud. In one variation, a company ships product to an outside warehouse, books the revenue to meet a year-end goal, and then returns the goods to its own inventory. A clue is that a large proportion of reported revenue is uncollected - the Swindlers book warns that when accounts receivable represent 80%+ of a quarter's sales, danger lurks. Another indicator is a reversal to accounts receivable in later periods. A third sign is a big sudden increase in the Quick Ratio, of which receivables is a key part.

11) Big discounts or extended payment terms to customers to bring forward sales into the current period to boost earnings. One sign is that the Gross Margin (Sales - Cost of Goods Sold) will decline.

Cash Flow Manipulation

12) Operating cash flow juiced up by a whole menu of possible tactics such as: sale of receivables, separate sales companies, stock option compensation instead of pay, prepaid maintenance, substituting property ownership for leasing, buying R&D instead of doing it in-house, paying consulting fees to related parties with shares and other techniques, as described by RetailInvestor.org in Cash Truths that Aren't.

The Beneish M Score - A good way to start investigating a particular company would be to apply the system of financial ratio tests developed by Indiana University professor Messod Beneish to detect earnings manipulation. The test uses eight different financial ratios and produces a single number that in Beneish's testing successfully identified about three quarters of manipulators, though it also wrongly labelled 18% of non-manipulators (see David Bricknell's short and readable summary on iStockAnalyst of the various ratios and what they mean).

That kind of result reminds us too that detection of fraud or manipulation is not always possible. Therefore we might not be sure about what a company is doing and how much that should affect the value of its stock. However, investigation directed at typical trouble spots can be a real boon for the investor contemplating purchasing a particular company's stock.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comments are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Financial Statement Manipulation and Fraud: A Dirty Dozen Warning Signs

Controversy again erupted on the stock market recently with first Sino-Forest Corp (TSX: TRE) being accused of illegal deceptive financial reporting and then Silvercorp (TSX: SVM) too being accused of falsifying data. Though the verdict on the accusations is not in for these two companies, it reminds us that financial misrepresentation does happen, ranging from dubious but often legal earnings management through to outright falsification and fraud.

Whether dishonest perpetrators eventually get caught or not, in the meantime investors can lose a lot of money since the inevitable result of the malfeasance is big losses in stock value and often total loss. It's better to detect problems in the first place and either avoid the stock altogether, or for those brave enough, such as those first raising the stink about Sino-Forest and Silvercorp, short-sell the stock.

To that end, we offer a list of warning signs that something may be amiss in a company. Most of these signs are culled from two books: Financial Statement Analysis (4th edition) by Martin Fridson and Fernando Alvarez and; Swindlers by Al Rosen and Mark Rosen (reviewed by CanadianFinancialDIY, by Jonathan Chevreau in the Financial Post and by CorporateKnights)

1. Unexpected turnover of senior management - e.g. the sudden resignation of the Chief Financial Officer or the CEO
2. Late financial statements - companies must publish results within a certain time after quarter and year-end dates; e.g. the Ontario Securities Commission sets out deadlines here
3. Incomplete quarterly statements - e.g. missing the Balance Sheet or Cash Flow Statement
4. Professional financial analysts state they cannot understand the company's financial statements - Fridson and Alvarez note that such was often said about Enron before it went up in smoke. They cite Warren Buffett's trenchant comment - "... if you cannot understand the footnotes [in financial statements], it is because management does not want you to."
5. Board members not sufficiently independent of management or not very experienced or with little ownership stake or simply a Board that is too small - this forms part of overall corporate governance, which we reviewed in our post Stocks and Corporate Governance: Do the Good Guys Finish First or Last?
6. Infrequent meetings of the Board audit committee - on the other hand, it is a good sign when the independent (i.e. not family or business relations of senior managers) committee members meet more than twice a year (see study in next bullet)
7. Members of the audit committee had short term stock options - see Corporate Governance and Earnings Management (download here from SSRN) by researchers Sonda Marrakchi Chtourou, Jean Bédard and Lucie Courteau
8. Management untrustworthy on other grounds - Fridson and Alvarez give the example of insider trading by Richard Scrushy at HealthSouth before it imploded
9. Related party non-arm's length transactions and private companies set up by executives to do business with the public company - these situations present opportunities for the executives to enrich themselves at the expense of the public company and its shareholders
10. Corporate restructurings - where there is the danger that excessive costs are written off, creating a cookie jar account reserve that management can use later to boost earnings as the high costs do not come to pass.
11. Industries that are more susceptible include non-manufacturing, non-retail sectors like finance, credit unions, banks, insurance, real estate and not surprisingly, resources
12. Weasel words in earnings conference calls - we can listen carefully to those post-earnings conference calls where management explains results to professional analysts (which the Internet now makes possible for individual investors to listen in on - get links from the company investor relations website area or a news website like CNW's webcast listing). According to David Larcker and Anastasia Zakolyukina's paper Detecting Deceptive Discussions in Conference Calls, the question and answer time at the end is where "... the answers of deceptive executives have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholder value. In addition, deceptive CEOs use significantly more extreme positive emotion and fewer anxiety words."

None of these warning signs is necessarily sufficient to conclude that hanky-panky is going on. Combinations of factors along with actual digging through the accounting statements is required to arrive at a determination. Nor is it 100% sure that even with the utmost expert due diligence - that was the depressing take-away from the Enron situation where pretty well everyone was oblivious to the fraud - will it be possible to detect every fraud. Nevertheless, paying attention to warnings signs and checking out the situation can help avoid investing grief.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Getting Started in Value Investing

Our last post reviewed past blog post lists of stocks picked by industry or by certain characteristics. Now is an opportune time to bring up the grand-daddy method of stock selection that is the basis used by most active investors - Value Investing. As Wikipedia explains in more detail here, Value Investors attempt to find bargain-priced stocks through so-called fundamental analysis of accounting data. Often this starts with the ratio of current stock Price to company Earnings, the P/E ratio, with lower P/E being better, i.e. the lower the Price paid for the company's yearly profits the better off the investor is.

Analysis then usually proceeds through a series of other ratios considered to be indicative of a "good buy", like low Price to Book Value, low Price to Assets, high Dividend Yield (dividend over Price) and of safety margin, like low Debt / Equity and high Interest Coverage (by how much the company's earnings exceed required interest payments to avoid a disastrous default). Within the general concept there are many variations in the practical specifics. To get you started, here are a few Value investor examples and some useful tools.

First, let us acknowledge Benjamin Graham, the practical and philosophical inspiration of Value investing. His book The Intelligent Investor, as updated by Jason Zweig, is still an essential read for any Value investor.

Ben Graham Center for Value Investing - headed by Dr. George Athanassakos
The website contains papers, audio downloads, links to data sources, book references. Athanassakos writes a regular column for the Globe and Mail, the most recent of which, The Contrarian Case for Active Investing, tells of his success in picking stocks that have outperformed. In A Faster Way to Identify Value Stocks, found at the Canadian Investment Review he gives more detail on his method, which includes these factors to derive the best combined SCORE to pick the stocks:

1. Low P/E stocks, excluding negative numbers (i.e. companies with negative earnings / losses)
2. Price > $1
3. Smallest Market Cap stocks (small companies)
   
4. Least liquid stocks (small trading volumes)
5. Highest Asset Turnover stocks (ratio of Sales over Balance Sheet Assets)
6. Highest Revenue growth stocks
7. Highest Earnings Per Share (EPS) growth stocks
8. Highest Earnings Before Interest and Taxes (EBIT) stocks
   

Mutual Funds - Amongst the resources listed by the Ben Graham Center are several fund management companies offering services to Canadian investors, who are said to espouse value investing methods, such as Burgundy Asset Management, Chou Associates, I.A. Michael Investment Council / ABC Funds (its principles for stock selection shown here on the Globe and Mail site), SteadyHand and others.

ETFs - Unsurprisingly, there are many Value-based ETFs. Sporting the word "value" in the fund's name, they vary in which factors are used to select the stocks, some using only historical P/E and P/B data, others using analyst forecasts as well. Stock-Encyclopedia.com has a list of Value Stock ETFs here. CanadianFinancialDIY commented on the "slippery" meaning of Value in ETFs and Yahoo Finance describes the different ETF definitions of Value.

Tweedy, Browne Company LLC - The 91 year-old portfolio management company subscribes to Value investing principles, which it explains in its free booklet What Has Worked in Investing. The factors Tweedy looks for:

1. Low P/E
2. Low P/B
3. High Dividend Yield combined with a low Dividend Payout (ratio of dividends to earnings)
4. Insider purchasing - executives and Board members buying shares themselves
5. Small market cap
6. Significant Price declines from highs

StingyInvestor - Investment advisor Norman Rothery lists his current and past stock picks using what he interprets to be Ben Graham's Value principles (e.g. in table 2 of 7 Graham Stocks for 2011). He provides informative comments on the practicalities and on the success of his picks.

Screening and Data Tools - To do your own searches and then assessments for Value stocks, here are some online resources.

1. ADVFN.com (free registration required) - This is by far the most complete and flexible source to screen stocks with numerous and varied criteria. One unique and very helpful feature is that for any metric chosen ADVFN shows the range of values and where the median and average values lie. This tells us what is a high or a low PE value at the moment; for instance, in the screenshot below we see that of all the TSX stocks with a positive P/E ratio (to do that we entered a constraint of PE greater than 0.1), the average P/E is 33 and the median is 12. We might thus set the constraint that a potential Value stock must have a P/E under 12. Adding other criteria results in a shorter and shorter list of candidate stocks. After winnowing the list down to a manageable number the real work of individually assessing each company begins and ADVFN includes a large number of financial ratios going back five years, along with graphs of many key numbers to enable quicker trend spotting and understanding what is driving each company.
2. InvestorPoint.com - This site contains perhaps the one thing missing from ADVFN that Value investors often monitor - Insider Trading e.g. Bank Of Montreal.
   
3. GlobeInvestor's My Watchlist - Quickly construct a portfolio of candidate stocks, with a selection of the key fundamental data in a variety of standard views plus the capability to build your own view with only data of interest to you. It's handy because the Watchlist is part of the GlobeInvestor website of business and investing news.

Methods of Corporate Valuation - The late Prof Ian Giddy of New York University wrote this short readable introduction to the methods of valuing a stock.

RetailInvestor.org - The anonymous investor author gets to the gist of many stock valuation issues with a very practical perspective. He notes many of the potential trip-ups and mistakes that can subvert an investor's evaluations in the sections on Stock Picking and the Cash Flow Debate.

The essence of Value investing is smart detective work. That's what will distinguish the companies and stocks that deserve their low price, as most do, from those that are truly under-valued. As a corollary we also need to keep in mind that sometimes we will be wrong - the detective work, even when done with great care, may give the wrong answer. The idea is that there may well be more losers than winners but the winners' gains will more than compensate for the losses on the losers. It is necessary to keep at it, keep track of new information and not put everything on the line in one stock.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.